By: Kevin M. Mosher, Esq.
As if the yo-yoing of the stock market over the past two years (and really over the past ten years) were not enough to cause 401(k) plan administrators headaches, the amount of scrutiny now being paid to them by the media, Congress and (perhaps more worrisome) the plan participants (employees) has heightened in the past year or so. As lobby groups and the media push for and Congress considers increased disclosure rules for administrators, employees nation-wide have continued filing a steady stream of actions seeking class status and recompense for what many of them have alleged to be unlawful: administrative fees, fiduciary oversight, mutual fund kick-backs, refusal to disclose fee structure and/or selection of investment options. Even with the recent rebound of the stock market and, presumably, employees' 401(k) balances, the consciousness developing over so-called hidden 401(k) fees portends increased litigation over 401(k) plan administration.
Several recent court cases have highlighted the scrutiny that 401(k) plan administrators now face and should expect to face absent a change in federal law. In March, for example, a federal court in New York allowed an employee class-action case to go forward against the employer Citigroup. Having withstood Citigroup's attempt to dismiss the claims, the employees have alleged that Citigroup unlawfully selected mutual funds from its own affiliates as part of the select group of funds that comprised investment options for the employees' 401(k) plan. The employees allege in their lawsuit that Citigroup's mutual funds charged higher fees than comparable mutual funds offered by Vanguard, thereby violating Citigroup's fiduciary responsibilities to the plan participants as required by federal law.
In another recent case from the 8th Circuit Court of Appeals, a class of employee participants in Wal-Mart's $10 billion 401(k) plan alleged several violations of federal law, including: Wal-Mart failed to adequately evaluate the investment options of the plan; the process by which mutual fund investments were selected were tainted by the trustee's (Merrill Lynch's) interest in choosing funds that provided kick-back fees; and that these decisions resulted in the plan (and its participants) being charged excessively high fees. Although the federal district court judge dismissed these claims, the circuit court overturned the dismissal finding that even though the employees were speculating and second-guessing the plan administration, the allegations brought by the employees were sufficient to allow the plaintiffs the opportunity to conduct extensive discovery to determine whether the 401(k) plan administrators were violating their fiduciary responsibilities to the plan participants.
Interestingly, in upholding one of the Wal-Mart plaintiff's arguments that the plan was charged excessively high fees, the Wal-Mart court noted that a "limited menu" of mutual funds meant that the plaintiffs may be able to prove their claim because of the lack of mutual fund selection. The Wal-Mart court distinguished its holding with a recent decision from the 7th Circuit Court of Appeals wherein that court dismissed a similar class allegation in Hecker v. Deere & Co. on the basis that the Deere plan offered more than 2,500 mutual fund options from which to select. Thus, the Wal-Mart court held that Wal-Mart's offering only a limited group of select and potentially excessively expensive mutual funds made it more likely that Wal-Mart did not consider the plan participants' best interests when it either deferred selection to Merrill Lynch or selected funds that were underperforming and/or too expensive.
These cases, as well as the increased media attention to 401(k) fees and oversight by companies, should serve as a wake-up call for companies of any size. By offering a 401(k) plan, companies are required to administer the plan in the interests of the participants. Companies should no longer feel safe by just choosing investment options for the participants and then leaving them unattended or deferring the decision-making to third-party investment companies. Instead, companies should make diligent efforts to understand the fee structure of the mutual funds that they offer to employees, review the fund's performance regularly and offer a variety of investment options to participants.
Should you have any questions on any benefits-related matters, including 401(k) administration, please feel free to contact Shareholder Kevin Mosher at (952) 746-1700 or kemosher@wesselssherman.com.
